[Federal Register Volume 82, Number 216 (Thursday, November 9, 2017)]
[Notices]
[Pages 52084-52087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24368]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82008; File No. SR-Phlx-2017-88]


Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the 
Exchange's Pricing Schedule at Section IV, Entitled ``Other Transaction 
Fees''

November 3, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 52085]]

notice is hereby given that on October 30, 2017, Nasdaq PHLX LLC 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III, below, which Items have been 
prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's Pricing Schedule at 
Section IV, entitled ``Other Transaction Fees.'' Specifically, the 
Exchange proposes to amend its subsidy program, the Market Access and 
Routing Subsidy or ``MARS,'' for Phlx members that provide certain 
order routing functionalities \3\ to other Phlx members and/or use such 
functionalities themselves.
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    \3\ The order routing functionalities permit a Phlx member to 
provide access and connectivity to other members as well as utilize 
such access for themselves. The Exchange notes that under this 
arrangement one Phlx member may be eligible for payments under MARS, 
while another Phlx member might potentially be liable for 
transaction charges associated with the execution of the order, 
because those orders were delivered to the Exchange through a Phlx 
member's connection to the Exchange and that member qualified for 
the MARS Payment. Consider the following example: Both members A and 
B are Phlx members but A does not utilize its own connections to 
route orders to the Exchange, and instead utilizes B's connections. 
Under this program, B will be eligible for the MARS Payment while A 
is liable for any transaction charges resulting from the execution 
of orders that originate from A, arrive at the Exchange via B's 
connectivity, and subsequently execute and clear at The Options 
Clearing Corporation or ``OCC,'' where A is the valid executing 
clearing member or give-up on the transaction. Similarly, where B 
utilizes its own connections to execute transactions, B will be 
eligible for the MARS Payment, but would also be liable for any 
transaction resulting from the execution of orders that originate 
from B, arrive at the Exchange via B's connectivity, and 
subsequently execute and clear at OCC, where B is the valid 
executing clearing member or give-up on the transaction.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.com/, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Phlx proposes to amend its subsidy program, MARS, which pays a 
subsidy to Phlx members that provide certain order routing 
functionalities to other Phlx members and/or use such functionalities 
themselves. Generally, under MARS, Phlx pays participating Phlx members 
to subsidize their costs of providing routing services to route orders 
to Phlx. The Exchange believes that MARS will continue to attract 
higher volumes of electronic equity and ETF options volume to the 
Exchange from non-Phlx market participants as well as Phlx members with 
the proposed amendments.
    Today, to qualify for MARS, a Phlx member's order routing 
functionality would be required to meet certain criteria.\4\ With 
respect to Complex Orders, the Exchange would not require Complex 
Orders to enable the electronic routing of orders to all of the U.S. 
options exchanges or provide current consolidated market data from the 
U.S. options exchanges. Any Phlx member may apply for MARS, provided 
the requirements are met, including a robust and reliable System. The 
member is solely responsible for implementing and operating its System.
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    \4\ Specifically the member's routing system (hereinafter 
``System'') would be required to: (1) Enable the electronic routing 
of orders to all of the U.S. options exchanges, including Phlx; (2) 
provide current consolidated market data from the U.S. options 
exchanges; and (3) be capable of interfacing with Phlx's API to 
access current Phlx match engine functionality. The member's System 
would also need to cause Phlx to be one of the top three default 
destination exchanges for individually executed marketable orders if 
Phlx is at the national best bid or offer (``NBBO''), regardless of 
size or time, but allow any user to manually override Phlx as the 
default destination on an order-by-order basis. The Exchange does 
not require Complex Orders to enable the electronic routing of 
orders to all of the U.S. options exchanges or provide current 
consolidated market data from the U.S. options exchanges.
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    Today, a MARS Payment would be made to Phlx members that have 
System Eligibility and have routed the requisite number of Eligible 
Contracts daily in a month, which were executed on Phlx. For the 
purpose of qualifying for the MARS Payment, Eligible Contracts include 
Firm,\5\ Broker-Dealer,\6\ Joint Back Office or ``JBO'' \7\ or 
Professional \8\ equity option orders that are electronically delivered 
and executed. Eligible Contracts do not include floor-based orders, 
qualified contingent cross or ``QCC'' orders,\9\ price improvement or 
``PIXL'' orders,\10\ Mini-Option orders \11\ or Singly-Listed Options 
\12\ orders. The Eligible Contracts requirements are not being amended.
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    \5\ The term ``Firm'' or (``F'') applies to any transaction that 
is identified by a Participant for clearing in the Firm range at 
OCC.
    \6\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \7\ The term ``Joint Back Office'' or ``JBO'' applies to any 
transaction that is identified by a member or member organization 
for clearing in the Firm range at OCC and is identified with an 
origin code as a JBO. A JBO will be priced the same as a Broker-
Dealer. A JBO participant is a member, member organization or non-
member organization that maintains a JBO arrangement with a clearing 
broker-dealer (``JBO Broker'') subject to the requirements of 
Regulation T Section 220.7 of the Federal Reserve System as further 
discussed at Exchange Rule 703.
    \8\ The term ``professional'' means any person or entity that 
(i) is not a broker or dealer in securities, and (ii) places more 
than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s). See Rule 
1000(b)(14).
    \9\ A QCC Order is comprised of an order to buy or sell at least 
1000 contracts that is identified as being part of a qualified 
contingent trade, as that term is defined in Rule 1080(o)(3), 
coupled with a contra-side order to buy or sell an equal number of 
contracts. The QCC Order must be executed at a price at or between 
the NBBO and be rejected if a Customer order is resting on the 
Exchange book at the same price. A QCC Order shall only be submitted 
electronically from off the floor to the Exchange's match engine. 
See Rule 1080(o).
    \10\ PIXL is the Exchange's price improvement mechanism known as 
Price Improvement XL or (PIXL\SM\). See Rule 1080(n).
    \11\ Mini Options are further specified in Phlx Rule 1012, 
Commentary .13.
    \12\ Singly Listed Options are options overlying currencies, 
equities, ETFs, ETNs treasury securities and indexes not listed on 
another exchange.
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    Phlx members that have System Eligibility and have executed the 
requisite number of Eligible Contracts in a month are paid rebates 
today as follows:

------------------------------------------------------------------------
                                                      Average
                                                       daily      MARS
                       Tiers                           volume    payment
                                                     (``ADV'')
------------------------------------------------------------------------
1..................................................      1,000     $0.01
2..................................................     27,500      0.08
3..................................................     32,500      0.10
4..................................................     40,000      0.12
------------------------------------------------------------------------

    With respect to the MARS program, the Exchange proposes two sets of 
changes. First, the Exchange proposes to change the eligibility 
criteria for the program so that, instead of requiring the member's 
System to designate Phlx to

[[Page 52086]]

be one of the top three default destination exchanges for individually 
executed marketable orders (if Phlx is at the NBBO), the Rule would 
require the member's System to designate Phlx to be one of the top five 
default designation exchanges in those circumstances. The Exchange 
proposes this change in recognition of the increasing number of options 
trading venues that exist and the desire of members for additional 
flexibility to route orders to such venues.
    Second, the Exchange proposes to replace the existing MARS Payment 
schedule in its entirety with a new schedule that will include all new 
ADV tiers as well as different rebate amounts that depend upon whether 
the Eligible Contracts that a member executes at a particular ADV tier 
are in Standard and Poor's Depositary Receipts/SPDRs (``SPY'') \13\ or 
not. The proposed tier schedule is as follows:
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    \13\ Options overlying Standard and Poor's Depositary Receipts/
SPDRs (``SPY'') are based on the SPDR exchange-traded fund 
(``ETF''), which is designed to track the performance of the S&P 500 
Index.

------------------------------------------------------------------------
                                                Average    MARS payment
                                                 daily   ---------------
                    Tiers                        volume    Non-
                                               (``ADV'')    SPY     SPY
------------------------------------------------------------------------
1............................................      1,000   $0.01   $0.01
2............................................     30,000    0.10    0.10
3............................................     40,000    0.12    0.12
4............................................     52,500    0.14    0.12
5............................................     65,000    0.18    0.12
6............................................     75,000    0.20    0.12
------------------------------------------------------------------------

    As is the case today, no payment will be made with respect to 
orders that are routed to Phlx, but not executed.\14\
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    \14\ A Phlx member will not be entitled to receive any other 
revenue for the use of its System specifically with respect to 
orders routed to Phlx with the exception of the Marketing Fee.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\15\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\16\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4) and (5).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \17\
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    \17\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\18\ (``NetCoalition'') the D.C. Circuit upheld the Commission's use of 
a market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\19\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \20\
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    \18\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \19\ See NetCoalition, at 534-535.
    \20\ Id. at 537.
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    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \21\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
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    \21\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    The Exchange believes that its proposal is reasonable to relax its 
MARS eligibility criteria so that members' Systems need only designate 
Phlx to be among their top five (rather than top three) default 
destination exchanges for individually executed marketable orders. The 
Exchange recognizes that the number of options trading venues has 
increased over the last few years and that members may desire or 
require flexibility to route orders to these venues. The proposal 
accommodates members in this respect without compromising their ability 
to participate in the MARS program. The proposal is not unfairly 
discriminatory in that the relaxed criteria will apply equally to all 
those who participate in the MARS program.
    The Exchange also believes that its proposal is reasonable to 
replace the existing MARS Payment schedule with a new schedule 
comprising new ADV tiers. The proposed schedule is designed to attract 
higher volumes of electronic equity and ETF options orders to the 
Exchange, which will, in turn, benefit all Phlx members by offering 
greater price discovery, increased transparency, and an increased 
opportunity to trade on the Exchange. The Exchange intends for the 
proposed schedule to achieve these results by increasing the number of 
ADV tiers in the schedule from four to six and, at each tier, paying a 
rebate that will be roughly the same as or greater than that which it 
pays now.\22\ For example, proposed Tiers 4, 5, and 6 will entitle 
members to receive payments of $0.14, $0.18, and $0.20 for non-SPY 
executions, respectively, and $0.12 for SPY executions, whereas the 
current top rebate is $0.12 for all types and volumes of executions.
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    \22\ The only instance in which the proposed schedule would 
result in member receiving a lower rebate than it does now for a 
given ADV would be where the member's ADV is between 27,500 and 
30,000 contracts.
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    The proposed tier structure will also allow Phlx members to price 
their services at a level that will enable them to attract order flow 
from market participants who would otherwise utilize an existing front-
end order entry mechanism offered by the Exchange's competitors instead 
of incurring the cost in time and money to develop their own internal 
systems to be able to deliver orders directly to the Exchange's System.
    The proposed MARS Payment schedule is not unfairly discriminatory 
because the Exchange will uniformly pay all Phlx members the rebates 
specified in the proposed MARS Payment tiers provided that the Phlx 
member has executed the requisite number of Eligible Contracts. 
Moreover, the Exchange believes that the proposed MARS Payments offered 
by the Exchange are equitable and not unfairly discriminatory because 
any qualifying Phlx member that offers market access and connectivity 
to the Exchange and/or utilize such functionality themselves may earn 
the MARS Payment for all Eligible Contracts.
    Although the Exchange proposes to offer different rebates for 
executions of Eligible Contracts in SPY and those in other options, the 
Exchange does not

[[Page 52087]]

believe that this proposal is unfairly discriminatory. SPY options are 
currently the most actively traded options class and the Exchange does 
not need to pay same rebates to incent members to route orders on SPY 
to the Exchange as it may need to pay to attract other types of options 
orders. Moreover, pricing by symbol is a common practice on many U.S. 
options exchanges.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. Because 
competitors are free to modify their own fees in response, and because 
market participants may readily adjust their order routing practices, 
the Exchange believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited. In 
sum, if the changes proposed herein are unattractive to market 
participants, it is likely that the Exchange will lose market share as 
a result. Accordingly, the Exchange does not believe that the proposed 
changes will impair the ability of members or competing order execution 
venues to maintain their competitive standing in the financial markets.
    In terms of intra-market competition, the Exchange believes that 
its proposed rebate schedule will be highly competitive, both with 
respect to SPY, which is the most actively traded options class, as 
well as non-SPY options. Indeed, the proposed rebates under the new 
schedule will in most instances be the same, if not higher, as they are 
under the existing schedule.
    Likewise, the proposed change to the MARS eligibility criteria is 
pro-competitive because it will make it easier for members to qualify 
for the program while routing orders to venues other than Phlx.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\23\
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    \23\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-Phlx-2017-88 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2017-88. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-Phlx-2017-88 and should be 
submitted on or before November 30, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24368 Filed 11-8-17; 8:45 am]
BILLING CODE 8011-01-P